U.S. President Donald Trump called China a “currency manipulator” during his election campaign. He had questioned as well policies in Japan, the world’s third largest single-country economy in nominal terms and one notch behind China. He challenged, for example, Japan’s market access to outsiders but in meeting Prime Minister Shinzo Abe last night apparently put aside those concerns.
Suppose for a second now that Japan is intentionally pushing its yen currency lower so exporters such as Honda and Panasonic can earn more money overseas. You can’t technically call it manipulation, because unlike in China the monetary agency Bank of Japan doesn’t set rates for the yen. The yen rises and falls like any other freely traded currency. But a government policy of reflation — taking low prices back to normal — has effectively pushed the yen lower against the U.S. dollar.
The Bank of Japan supports price growth in the way it sets interest rates, according to the International Monetary Fund (IMF). Abe’s post-2012 monetary easing, budget stimulus and other reforms have further “reversed the undue appreciation of the yen,” the IMF says. Countries with low inflation generally see their currencies appreciate. They depreciate after prices go up for a while. Consumer prices in Japan fell 0.2% last year but should rise 1% this year, French investment bank Natixis forecasts.
Today a dollar buys about 115 yen. By June it will buy 120 yen, Tokyo-based Nikko Asset Management forecasts. Some are betting on a few more. “Exporters would be extremely happy at this level, and importers don’t have too much political clout anyway,” Nikko’s chief global strategist John Vail says.
Japan needs the boost. Dogged by shaky demand in world markets and hesitant consumer spending at home, growth in the first half of 2016 was near zero. It picked up in the second half for full-year growth of 1% largely as exporters got a boom in orders from China and the United States. The Organisation for Economic Co-operation and Development expects 1% growth again in 2017 but less next year.
Exports, incidentally, are huge. Driven by world-recognized brands of manufactured goods such as cars, electronics and machinery, they made up more than 17% of Japan’s economy in 2015, six percentage points higher than in 1960, according to World Bank data.
A weak currency lets exporters exchange U.S. dollars earnings for more yen in Japan. Countries that do not engineer currency rates face competitive disadvantages against the likes of China and Japan. But a weak currency windfall alone, which exporters have experienced before, won’t necessarily save industry despite government moves to hold yen prices down. A lot of manufacturers have moved production of consumer goods such as electronics to other parts of Asia and world consumer demand is still an X factor, says Kohei Iwahara, an economist with Natixis in Tokyo.
“A weaker yen may not increase exports from Japan, unless demand for global investment recovers,” he says. “In fact, exports of goods have disappointed over the past few years despite of the weaker yen.” (Forbes)